Friday, September 2, 2011

Stocks fall sharply after terrible jobs report

Stocks on Friday fell sharply after the Commerce Departments Non Farm Payrolls report showed employers added 18,000 jobs for the month of August. This was far below the consensus forecast of economists of 66,000 jobs.

The August report was hurt by striking Verizon telecommunications workers which removed 45,000 workers from the tally. The July numbers were also revised down from over 100,000 to 80,000.

Mohamed El-Erian, chief executive officer at PIMCO in Newport Beach called the employment report "grim and scary," earlier today in an interview on Bloomberg TV.

In a particularly awful portion of the report, average hourly earnings dropped .1% to 23.09/hr and hours worked dropped 6 minutes to 34.2 hours. This does not bode well for consumer spending going forward. The jobless rate remained the same at 9.1%

Government bickering, uncertainty over the debt ceiling and the downgrade of the US Sovereign debt can be blamed for the poor payroll number. Consumer and business confidence was crushed after the spectacle in Washington.

Stocks dropped more than 200 points on the news on the heels of a more than 100 point drop yesterday. Gold was up 3% and treasury bond yields plummeted as traders bought up more recession protection.

European shares were slammed as well with the German DAX down almost 4% as of 7:30PST.

STOCKS

I am watching Annaly Capital Management(NLY) again today as it has been doing relatively well in a bad tape after yesterday's thrashing. The proposed SEC rule changes would drastically alter their business model by forcing them to reduce their leverage from 600% to who knows what. Annaly's leverage is the life blood of their business so any reduction would be catastrophic for the dividend and stock price. People buy Annaly for it's 14% dividend and in this low interest rate era, it would seem like one of the better places to be. Unfortunately, NLY and MREITs in general are being attacked by the government who is trying raise revenues and looking everywhere they can. Investors today are bargain hunting perhaps thinking that this regulation is unlikely to be enacted because it would require legislation that would be very hard to pass in this political environment. NLY is still down .5% as of 9:21 AM PST but is well off this mornings lows at 16.80. I liquidated my position in NLY today for a small loss.

AAPL is also outperforming today in a lousy tape. This reiterates my thesis that AAPL is a defensive play and a quasi safe haven in this market environment. AAPL is coining money and has 80 dollars of cash on it's balance sheet. It has an 80% growth rate but is trading at a backward PE of 15! Incredible. This stock should be double what it's trading at, but the law of large numbers comes into play here. Stocks with a higher market cap are perceived to be harder to grow than smaller companies. People think that it's easier to go from 1 billion market cap to 2 billion market cap than it is to go from 350 billion to 700 billion. This is probably true, but AAPL is a different case in my opinion.

IWM is getting crushed today again after yesterdays 2% drop. IWM is down 3.5% confirming my idea that this rally is probably over for now. I was contemplating buying RWM yesterday but never did and am now kicking myself for it. Oh well, there was too much event risk there with the unemployment report.

We might trade down to 1120 on the S&P from here. I feel I have missed my chance to short as we are now in the middle of a trading range between 1120-1230. I will just sit and observe.